The Apothecary, a blog about health care and entitlement reform, is edited by Avik Roy, a Senior Fellow at the Manhattan Institute for Policy Research and a former health-care policy adviser to Mitt Romney. Avik also writes a weekly column on politics and policy for National Review.
The other contributors to The Apothecary are: Josh Archambault, Director of Health Care Policy at the Pioneer Institute in Boston; Robert Book of the American Action Forum; Chris Conover, Research Scholar in the Center for Health Policy and Inequalities Research at Duke University and an Adjunct Scholar at the American Enterprise Institute; Nicole Fisher of the University of North Carolina; John R. Graham of the Advanced Medical Technology Association; and Jeet Guram of Harvard Medical School.

Myths of the 'Free Rider' Health Care Problem

Both the policy justification, and part of the Constitutional justification, for including the individual mandate in Obamacare is that the individual mandate will eliminate “free-riding,” in which the uninsured take advantage of free emergency-room care at taxpayer expense. This, from Judge Vinson’s ruling:

The defendants contend that there are three unique elements of the health care market which, when viewed cumulatively and in combination, belie the claim that the uninsured are inactive. First, as living and breathing human beings who are always susceptible to sudden and unpredictable illness and injury, no one can “opt out” of the health care market. Second, if and when health services are sought, hospitals are required by law to provide care, regardless of inability to pay. And third, if the costs incurred cannot be paid (which they frequently cannot, given the high cost of medical care), they are passed along (cost-shifted) to third parties, which has economic implications for everyone. Congress found that the uninsured received approximately $43 billion in “uncompensated care” in 2008 alone. These three things, according to the defendants and various health care industry experts and scholars on whom they rely, are “replicated in no other market” and defeat the argument that uninsured individuals are inactive.

The contention that the individual mandate is necessary, because it solves the “free-rider” problem, is worthy of further examination: because it suffers from numerous conceptual and factual flaws.

1. In the first place, “free-riding” is an artifact of clumsy government policy

People talk about “free-riding,” or uncompensated care, as if it were a law of physics, like gravity: a fundamental problem that has no other solution than forcing everyone to buy health insurance. But it’s not. In fact, “free-riding” is a direct result of a clumsy, unfunded mandate passed by Congress in 1986, called the Emergency Medical Treatment and Active Labor Act, or EMTALA.

EMTALA requires that hospitals provide emergency care to anyone who needs it, regardless of citizenship, legal status (i.e. illegal immigrants), or ability to pay. Technically speaking, EMTALA only requires this of hospitals that accept Medicare and Medicaid insurance. But since Medicare and Medicaid represent more than half of all health expenditures in the United States, very few hospitals are equipped to function without government funding, and therefore, nearly every hospital in the United States is covered by EMTALA.

EMTALA is, indeed, the central factor in the “free-rider” phenomenon. The government forces hospitals to care for these individuals, without financially compensating hospitals for the cost of doing so. It is one of the largest and most coercive unfunded mandates in the United States.

Personally, I think it’s a good thing that we as a country ensure that everyone, regardless of ability to pay, has access to emergency health care. (We might even call it universal health care.) As I wrote last year,

There are some instances in which we should obviously consider more than economics: Certainly no wealthy nation should allow a destitute woman who has been hit by a car to die in the street. Likewise, in a pressing emergency, catastrophic care should be provided to those who need it, and the costs can be sorted out later…A more organized program to cover these expenses — provided that the distinction between emergency, chronic, and routine care were reasonably well defined — would be a step forward, and would also clarify the boundaries of the free market in health insurance.

Even leaving comprehensive health reform aside, there are many, many alternatives to caring for these individuals that don’t involve an individual mandate. The government could cut other spending or raise taxes in order to fully reimburse hospitals for EMTALA care. The government could require hospitals to check for Medicaid, Medicare, and S-CHIP eligibility, and then fully fund care for the remainder of the uninsured. You could repeal EMTALA and replace it with a PPACA-like expanded Medicaid program. None of these adjustments are optimal, but none of them impose a Constitutionally problematic individual mandate.

(In an ideal world, we would replace both EMTALA and government-controlled Medicaid with cash payments or premium support for the indigent to purchase their own catastrophic coverage in the private market.)

2. PPACA’s individual mandate overshoots the free-riding problem

The problem of uncompensated care is one of uncompensated care in the emergency room (and any other care arising from an admission to the ER). But Obamacare’s individual mandate doesn’t allow people to buy inexpensive insurance focused on emergency care: instead, it forces people to buy comprehensive insurance packages with a generous list of basic benefits, benefits far exceeding those required to address the issue of uncompensated emergency room care.

You’re not going to the emergency room to get a mammogram. Hence, a significant portion of the individual mandate—the portion that requires people to buy insurance exceeding ER care—has nothing to do with the policy problem of uncompensated care.

In Massachusetts, the uncompensated care pool did shrink after the installation of Romneycare: but only by two-fifths. Uncompensated care in the Bay State was $661 million in the pool’s 2007 fiscal year, $409 million in PFY 2008, and $414 million in PFY 2009. That’s not terrible, but underwhelming compared to what Massachusetts residents were promised, especially considering Romneycare’s staggering cost: remember that the mandate comes with large subsidies so that lower-income individuals aren’t forced to buy something they can’t afford. (The percentage of uninsured went from 5.7% in 2007 to 2.7% in 2009.)

Whether you support or oppose PPACA, the fact is, it doesn’t cover everyone. If you go by the Congressional Budget Office’s numbers, which are flawed in many ways, the uninsured population will shrink under PPACA from 50 million in 2010 to 23 million in 2019. Therefore, under Obamacare, there will continue to be a sizable population of uninsured individuals, including much of the illegal immigrant population, which isn’t eligible for PPACA’s benefits but will still gain access to uncompensated care via EMTALA.

Yes, Massachusetts has saved about $250 million in uncompensated care. On the other hand, in 2011, the state’s insurance subsidies will cost more than $830 million, and are growing at 5% a year. Why is spending large gobs of taxpayer money to only partially address a problem costing less gobs of taxpayer money called an improvement?

4. Uncompensated care is a small problem, relative to undercompensated care

Because Medicaid dramatically underpays physicians for treating Medicaid patients—under 60 percent of what private insurance pays—very few physicians actually admit Medicaid patients into their practices. As a result, many Medicaid beneficiaries are forced to go to the ER to seek basic medical care. And Medicaid underpays hospitals just as it underpays doctors. Indeed, on average, hospitals lose money on every Medicaid patient they treat, receiving 88 Medicaid cents for every dollar of health costs.

So hospitals are losing money, not because of uncompensated care due to EMTALA, but rather because of under-compensated care due to Medicaid and also Medicare. While uncompensated care may indeed account for tens of billions of dollars per year, under-compensated care accounts for hundreds of billions of dollars per year, a number that Obamacare will increase. The true “free-rider” isn’t the uninsured. It’s the government.

5. Mandates reduce access to emergency care for the most vulnerable

As John Goodman of the National Center for Policy Analysis has often pointed out, in Massachusetts, where an individual mandate was instituted in 2006, emergency room traffic is higher than ever before. Indeed, between 2005 and 2007, Massachusetts ER visits rose by 7 percent, and the state’s costs of caring for ER patients rose 17 percent between 2007 and 2009.

The uninsured don’t even account for their fair share of health expenditures. A Kaiser Family Foundation study found that, while the uninsured made up 15 percent of KFF’s surveyed population, the uninsured accounted for only 14 percent of total ER visits, and only 12 percent of aggregate ER expenditures.

By contrast, Medicaid beneficiaries accounted for 9 percent of the population, but 15 percent of visits and 9 percent of expenses. (For those with private insurance, the stats were 60%, 47%, and 54% respectively; for Medicare beneficiaries, 14%, 20%, and 22%.)

Why does this happen?

It’s pretty simple: if your health care is paid for, you are more likely to see the doctor more, and consume more tests and procedures, than if you are uninsured. Hence, people with insurance consume, on average, twice as much health care as do the uninsured.

This problem leads to more ER crowding, poorer access to emergency care for the truly vulnerable, and more losses for hospitals. Hospitals can’t make more money on patients if they are turning those patients away due to capacity constraints. (Remember that the biggest part of how PPACA covers the uninsured is by expanding Medicaid.)

6. Only a fraction of uncompensated care is obtained by “free riders”

The reason why Massachusetts reforms didn’t eradicate the uncompensated care problem is because only a fraction of uncompensated care is obtained by “free riders.” Many of the people who seek uncompensated care, as described above, are on Medicaid, or are exempt from the individual mandate because their income falls below 133 percent of the federal poverty level.

Still others are uninsured because they have a pre-existing condition, and can’t gain coverage. Hence, the number of actual free-riders, who are healthy and wealthy and refusing to buy insurance, is actually 0.67 percent of national health expenditures: a rounding error.

In addition, not everyone who is uninsured pays nothing for their care. Many people who are uninsured pay directly for the cost of their care when they are sick. Just because someone is uninsured doesn’t mean that someone is a free-rider.

The bottom line

The free-rider problem was caused by clumsy government policy. The solution to the problem, therefore, isn’t to add more clumsy government policy on top: it is to fix the original policy. PPACA’s individual mandate is not needed to address the free-rider problem. Furthermore, aspects of the individual mandate have nothing to do with the free-rider problem.

For all that, the individual mandate is only capable of partially relieving the free-rider problem, and simultaneously creates entirely new problems of increased spending, ER overcrowding and limited ER access for the truly needy.

Let that sink in for a second: the Constitutional justification of the individual mandate—that it is necessary to relieve the problem of uncompensated care—is an unproven, if not disproven, hypothesis.

Constitutional law is supposed to be about the Constitution, not health care policy. But PPACA’s advocates are arguing that the constitutionally dubious mandate is required to address a pressing public policy problem. Unfortunately, that isn’t true. Here’s hoping that someone raises these points when Florida v. HHS gets heard in the Eleventh Circuit Court of Appeals.

UPDATE 1: John Cogan, Glenn Hubbard, and Daniel Kessler, writing in the Wall Street Journal, discuss some of the economic research surrounding cost-shifting and the uninsured. I thought this observation, in particular, was interesting:

Where did Congress go wrong [in calculating the cost of the “free rider” problem as $43 billion per year]? We traced its estimates of the magnitude of the hidden tax of $43 billion per year, or an increase in family premiums by an average of $1,000 per year, to two sources—the aforementioned Health Affairs study, and a non-peer-reviewed study commissioned by FamiliesUSA, a Washington, D.C., group long known for its advocacy of greater government involvement in health care. Yet Congress simply ignored the evidence in the Health Affairs study and failed to recognize the serious flaws in the FamiliesUSA analysis.

Specifically, Congress ignored the $40 billion to $50 billion that is spent annually by charitable organizations and federal, state and local governments to reimburse doctors and hospitals for the cost of caring for the uninsured. These payments, which amount to approximately three-fourths of the cost of such care, mitigate the extent of cost shifting and reduce the magnitude of the hidden tax on private insurance.

UPDATE 2: Philip Klein quantifies the revenue generated by the individual mandate, relative to the costs of uncompensated care in Massachusetts:

In fiscal year 2010, according to the Massachusetts Division of Finance, the state government collected just $17.8 million in fines from people not complying with the mandate. But uncompensated care was a stubborn $475 million, according to the state’s Division of Health Care Finance and Policy. (The state could only pay $405 million, with shortfall cost falling on hospitals.)

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Are you suggesting that people be turned away from hospitals if they do not have the ability to pay?

You say “underfunded” are you suggesting that the US Government PAY for the uninsured who go to hospitals? Wouldn’t that increase the deficit? And would that not indeed make the uninsured free-loaders?

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You say: “You’re not going to the emergency room to get a mammogram”

Precisely the point! You may not be going to the ER for a mammogram, but you may be going to the ER because you DID NOT GET a monogram! Their IS a cost to society for people who get sick for things that could have been prevented or caught early. These costs are both direct – the medical care they receive – and indirect – the cost to businesses for workers who miss work, or even die.

It seems to me you actually show why we need some form of universal health care.

Why should hospitals be required to provide free care? Why should anyone be required to produce any good or service for free? No one has the right to make other people work for them – only to offer to hire them. We abolished slavery 150 years ago.

Because doctors and hospitals are provide government monopolies via health care provider licensing. If the want the right to not provide free care, they should give up the right to these licensing monopolies. The licensing monopolies did not always exist; in large part it was organizations such as the AMA which lobbied for their creation.

The AMA is always blamed by uninformed would-be libertarians for the problems in health care. The AMA is a vestige of its former self and has no influence on licensure. Medical school is hard and takes a long time. Fewer and fewer students will be willing to acquire the debt and spend the time in return for a diminishing compensation. The gap is being filled by nurse practitioners and PAs and some are very good. Foreign graduates are common. There just aren’t enough people smart enough and dedicated enough to work for nothing. That’s your problem.

Well, he’s writing about the wrong problem. The individual mandate has to do with how you prevent people from simply waiting until they’re sick to get insurance once the ban on pre-existing conditions goes into effect. If insurance companies can’t stop sick people from getting insurance, then people will just wait until they are sick. THAT is the problem the mandate fixes. You can’t have a ban on pre-existing conditions without an individual mandate.

The question is, does the author realize that’s the main point of the mandate? Is he dumb, or is he lying? It has to be one or the other because this post is too divorced from the reality of the debate to be anything else.

Here’s one of the main minds (if not the main mind) behind Romney and Obama’s plans discussing it:

If Roy could make a case that its possible to still ban insurance companies from denying coverage for people without pre-existing conditions without having a mandate, he’d have a salient point about the mandate. But, he doesn’t make that argument because he can’t, so instead he pretends the argument is about something entirely different. As I said, he’s either too dumb to know what the real debate is about, or he’s lying about what it’s really about.

Avik – I think you are misstating the ‘free rider’ problem by confining the discussion to emergency care. As you note, the law requires only that ERs treat those with emergencies. Once they are stabilized, all bets are off. This is not the primary concern of the free rider concept. The primary concern is that when people receive a cancer diagnosis that is going to cost huge sums of money for treatment; or learn they have diabetes and now require treatment that nobody would want to have to pay for out-of-pcoket, that is when they will buy into the health insurance market. The big money spent in this country on health care is spent on chronic illnesses – heart disease, cancer, diabetes,etc. It’s not really about ER care.

I realize that your piece is confined to the ‘free rider’ issue but I’m not sure we can examine the issue of mandated coverage without acknowledging that this is but one piece of the issue. The primary problem addressed by this device is that we cannot sustain a private health insurance market which is required to provide coverage to those most likely to get sick (pre-existing conditions) without requiring the healthy into the pools. While I personally suspect that the private insurance business model no longer works even with mandates, without them, insurers can only stay alive and profitable if they insure healthy people and healthy people only, put caps on the coverage limits, etc., etc.

We can’t have everyone covered without mandates unless the government steps in to do the job. Thus, if we want full coverage, it is pick your poison – government or mandated private coverage. So far, I’ve seen no alternatives or ideas that raise any other ways to go.

Lumped in with free riders are people who are continuously insured but whose group membership changes. It’s one thing to choose to be uninsured and then seek insurance after a diagnosis of diabetes. It’s quite another to have diabetes, get laid off from a job, and be unable to get insurance from the same insurer.

“A Kaiser Family Foundation study found that, while the uninsured made up 15 percent of KFF’s surveyed population, the uninsured accounted for only 14 percent of total ER visits, and only 12 percent of aggregate ER expenditures. By contrast, Medicaid beneficiaries accounted for 9 percent of the population, but 15 percent of visits and 9 percent of expenses”.

This does not strike me as a meaningful comparison. The Medicaid population, compared with other populations, includes a disproportionately large number of disabled and chronically ill people.